Balance in Trading a/c

The Trading a/c is a nominal account. It's balance indicates either a profit (Gross Profit) or a loss (Gross Loss). It is closed at the end of the accounting period by transferring its balance to the Profit and Loss a/c.

Balance in Profit and Loss a/c

The Profit and Loss a/c is also a nominal account. It's balance indicates either a profit (Net Profit) or a loss (Net Loss). It is closed at the end of the accounting period by transferring its balance to either the Capital a/c or the Profit and Loss Appropriation (or Retained Earnings) a/c.

Since the Trading a/c and the Profit and Loss a/c are also closed at the end of the accounting period, they are just like any other nominal accounts in this respect. The Trading a/c and Profit and Loss a/c relating to a particular accounting period are independent of similar accounts relating to any other accounting period.

Influence of Profits on Capital

Profits are the returns for the risk that Capital takes in business. Losses can be taken as negative profits. Profits increase capital and losses decrease capital.

Transfer to Capital a/c

The net profit belongs to the ownership of the business which is represented by the Capital account. Therefore, the net profits or losses are ultimately transferred to the Capital account.

We say that the Profit and Loss a/c is closed by transferring the balance to the Capital a/c.

Information lost in transferring to capital a/c

At the time of starting the business, the owner invests certain amount as his capital contribution for the business either in the form of cash or any other assets.

Capital a/c balance keeps changing

• He may be making more contributions or withdrawing capital during the course of time on account of which the capital account balance keeps changing. It increases when additional capital is brought in and decreases when capital is withdrawn.
• As time goes by, the organisation would be making profits or losses over the various accounting periods it passes through. When profits or losses are transferred to the Capital account, the balance in that account keeps changing. It increases when there are profits and decreases when there are losses.

Because the capital account balance is influenced both by capital contributions or withdrawals as well as profits and losses made, it would not be possible to obtain the information relating to capital accumulated through contributions and capital accumulated through profits.

Transfer to Profit and Loss Appropriation a/c

If the organisation intends to have the information relating to capital account balance influenced by owners contributions and withdrawals and the capital that has been accumulated and influenced by the profits/losses made in the business through its operations distinctly and readily available, it would transfer the profits or losses to a separate account by name Profit and Loss appropriation a/c instead of the Capital a/c and retain the balance in that account.

The balance in the Profit and Loss appropriation a/c is carried over from year to year as it is an equivalent of the capital account. It may sometimes be called with other names like Retained Earnings a/c.

Consider the following ledger account balances at the end of an accounting period

Trial Balance of M/s Razmataz Chemicals as on 31^st December 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Opening Stock a/c Purchases a/c Salaries a/c Rent a/c Wages a/c Carriage Inwards a/c Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Sales a/c Debtors a/c Machinery a/c Bank Loan a/c	– – – – – – – – – – – – – – –	20,000 1,20,000 25,000 18,500 47,000 12,400 24,600 44,000 75,000 62,900 1,76,000	1,84,000 37,300 3,32,000 72,100
Total		6,25,400	6,25,400

In the books of M/s Razmataz Chemicals for the accounting period ending 31^st December 20_5

Trading a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Wages To Carriage Inwards To Gross Profit	20,000 1,20,000 47,000 12,400 1,32,600	By Sales	3,32,000
	3,32,000		3,32,000

Profit & Loss a/c

DrCr
Particulars	Amount	Particulars	Amount
To Salaries To Rent To Net Profit	25,000 18,500 89,100	By Gross Profit	1,32,600
	1,32,600		1,32,600

The P/L a/c shows a credit balance when there are profits. Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.

Journal

Journal

Particulars		Amount (Dr)	Amount (Cr)
Profit and Loss a/c To Capital a/c	Dr	89,100	89,100
[For the transfer of the net profit to the capital account.]

Ledger

Capital a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Balance c/d	2,73,100	– 31/12/_5	By Balance b/d By Net Profit	1,84,000 89,100
	Total	2,73,100		Total	2,73,100
			01/01/_6	By Balance b/d	2,73,100

Trial Balance

The "Trial Balance" redrawn after closing the Profit and Loss a/c

Trial Balance of M/s Razmataz Chemicals as on 31^st December 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Machinery a/c Bank Loan a/c	– – – – – – – –	24,600 44,000 75,000 62,900 1,76,000	2,73,100 37,300 72,100
Total		3,82,500	3,82,500

Balance Sheet

Balance Sheet of M/s Razmataz Chemicals as on 31-12-20_5

Liabilities	Amount	Assets	Amount
Capital Creditors Bank Loan	2,73,100 37,300 72,100	Cash Bank Furniture Debtors Machinery	24,600 75,000 44,000 62,900 1,76,000
	3,82,500		3,82,500

The P/L a/c shows a credit balance when there are profits. Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.

Journal

Journal in the books of M/s Trinity Foods for the period from 1^st June 20_5 to 30^th June 20_5

Particulars		Amount (Dr)	Amount (Cr)
Profit and Loss a/c To Profit and Loss Appropriation a/c	Dr	47,000	47,000
[For the transfer of the net profit to the profit and loss appropriation account.]

Ledger

Profit and Loss Appropriation a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
30/06/_5	To Balance c/d	47,000	30/06/_5	By Net Profit	47,000
	Total	47,000		Total	47,000
			30/06/_5	By Balance b/d	47,000

Trial Balance

The "Trial Balance" redrawn after closing the Profit and Loss a/c in this case would be

Trial Balance of M/s Razmataz Chemicals as on 31^st December 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Machinery a/c Bank Loan a/c Profit and Loss Appropriation a/c	– – – – – – – – –	24,600 44,000 75,000 62,900 1,76,000	1,84,000 37,300 72,100 89,100
Total		3,82,500	3,82,500

Balance Sheet

Balance Sheet of M/s Razmataz Chemicals as on 31-12-20_5

Liabilities	Amount	Assets	Amount
Capital P & L Appropriation Creditors Bank Loan	1,84,000 89,100 37,300 72,100	Cash Bank Furniture Debtors Machinery	24,600 75,000 44,000 62,900 1,76,000
	3,82,500		3,82,500

Alternative

The basic purpose of accounting is derivation of information. Where the organisation feels that in addition to having the information relating to the Capital a/c and the accumulated profits separately, it also needs to know the total amount of capital available with it (including accumulations), the two accounts are clubbed and shown in the Balance Sheet.

Balance Sheet of M/s Razmataz Chemicals as on 31-12-20_5

Liabilities	Amount	Amount	Assets	Amount	Amount
Capital Add: P & L Appropriation Creditors Bank Loan	1,84,000 89,100	2,73,100 37,300 72,100	Cash Bank Furniture Debtors Machinery		24,600 75,000 44,000 62,900 1,76,000
		3,82,500			3,82,500

Since here both the accounts being clubbed lie on the same side of the balance sheet, the two amounts are added up.

Consider the following ledger account balances relating to an organisations accounting

Trial Balance of M/s Razmataz Chemicals as on 31^st December 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Opening Stock a/c Purchases a/c Salaries a/c Postage & Stationary a/c Wages a/c Carriage Outwards a/c Rent & Insurance a/c Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Sales a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c	– – – – – – – – – – – – – – – –	50,000 2,35,000 48,000 8,500 15,000 24,400 18,250 86,000 24,000 61,000 58,600 1,45,000	2,50,000 58,250 2,63,400 2,02,100
Total		7,73,750	7,73,750

Trading a/c

DrCr
Particulars	Amount	Particulars	Amount
To Opening Stock To Purchases To Wages a/c To Gross Profit	50,000 2,35,000 15,000	By Sales By Gross Loss	2,63,400 36,600
	3,00,000		3,00,000

Profit & Loss a/c

DrCr
Particulars	Amount	Particulars	Amount
To Gross Loss To Salaries To Postage and Stationery To Carriage Outwards To Rent and Insurance	36,600 48,000 8,500 24,400 18,250	By Net Loss	1,35,750
	1,35,750		1,35,750

The P/L a/c shows a debit balance when there are losses. Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.

Journal

Journal

Particulars		Amount (Dr)	Amount (Cr)
Capital a/c To Profit and Loss a/c	Dr	1,35,750	1,35,750
[For the transfer of the net loss to the capital account.]

Ledger

Capital a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5 31/12/_5	To Net Loss To Balance c/d	1,35,750 1,14,250	–	By Balance b/d	2,50,000
	Total	2,50,000		Total	2,50,000
			01/07/05	By Balance b/d	1,14,250

Trial Balance

The "Trial Balance" redrawn after closing the Profit and Loss a/c

Trial Balance of M/s Razmataz Chemicals as on 31^st December 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c	– – – – – – – –	86,000 24,000 61,000 58,600 1,45,000	1,14,250 58,250 2,02,100
Total		3,74,600	3,74,600

Balance Sheet

Balance Sheet of M/s Razmataz Chemicals as on 31-12-20_5

Liabilities	Amount	Assets	Amount
Capital Creditors Debenture Loan	1,14,250 58,250 2,02,100	Cash Bank Furniture Debtors Land and Buildings	86,000 61,000 24,000 58,600 1,45,000
	3,74,600		3,74,600

The P/L a/c shows a debit balance when there are losses. Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.

Journal

Journal

Particulars		Amount (Dr)	Amount (Cr)
Profit and Loss Appropriation a/c To Profit and Loss a/c	Dr	1,35,750	1,35,750
[For the transfer of the net loss to the profit and loss appropriation account.]

Ledger

Profit and Loss Appropriation a/c

DrCr
Date	Particulars	Amount	Date	Particulars	Amount
31/12/_5	To Net Loss	1,35,750	–	By Balance c/d	1,35,750
	Total	1,35,750		Total	1,35,750
30/06/_5	To Balance b/d	1,35,750

Trial Balance

The "Trial Balance" redrawn after closing the Profit and Loss a/c

Trial Balance of M/s Razmataz Chemicals as on 31^st December 20_5

Particulars	L/F	Amount (Dr)	Amount (Cr)
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c Profit and Loss Appropriation a/c	– – – – – – – – –	86,000 24,000 61,000 58,600 1,45,000 1,35,750	2,50,000 58,250 2,02,100
Total		5,10,350	5,10,350

Balance Sheet

Balance Sheet of M/s Razmataz Chemicals as on 31-12-20_5

Liabilities	Amount	Assets	Amount
Capital Creditors Debenture Loan	2,50,000 58,250 2,02,100	Cash Bank Furniture Debtors Land and Buildings P & L Appropriation	86,000 61,000 24,000 58,600 1,45,000 1,35,750
	5,10,350		5,10,350

Alternative

Balance Sheet of M/s Razmataz Chemicals as on 31-12-20_5

Liabilities	Amount	Amount	Assets	Amount	Amount
Capital Less: P & L Appropriation Creditors Debenture Loan	2,50,000 1,35,750	1,14,250 58,250 2,02,100	Cash Bank Furniture Debtors Land and Buildings		86,000 61,000 24,000 58,600 1,45,000
		3,74,600			3,74,600

Since here both the accounts lie on different sides of the balance sheet, the two amounts are set off.

Nominal Account

If Profit & Loss Appropriation a/c is maintained, the Net profit or loss revealed by the Profit and Loss a/c in every accounting period is transferred to that account. Thus the accumulated balance in the Profit & Loss Appropriation a/c also indicates either a profit or loss which qualifies it to be called a nominal account.

However, the Profit & Loss Appropriation a/c, though a nominal account is not closed. The balance in that account is carried over to the subsequent accounting periods just like balances in the case of Real or Personal accounts.

With regard to this characteristic, the Profit & Loss Appropriation a/c is a special account.

Personal Account

The balance in the Profit and Loss appropriation account indicates capital accumulated through profits. As such it is an equivalent of the Capital a/c. Thus we can say it is a personal account.

Special Nominal Account

Nominal accounts which are not closed at the end of the accounting period and whose balances are carried forward from one accounting period to another are identified as Special Nominal accounts, for the purpose of understanding. Balances of these accounts, appear in the balance sheet along with the other Real and Personal account balances.

Profit and Loss Appropriation a/c whose balance is carried forward from one accounting period to another may be called a special nominal account.